AI Emerges as the Leading Financial Stability Risk

Risks associated with artificial intelligence have become the most frequently cited concern for US financial stability, according to the Federal Reserve’s latest semi-annual Financial Stability Report.

The survey found that 87% of respondents considered AI a significant financial stability risk, compared with 50% in the previous survey conducted in May. Concerns included cyberattacks, complex AI-related financing arrangements and the possibility that weaker earnings across the sector could trigger a broader market correction.

Other major concerns included a potential correction in risk assets, cited by 52% of respondents, and higher long-term interest rates, identified by 48%. Cyberattacks and fiscal debt sustainability were each cited by 43%.

The survey was conducted in September and October, before the latest developments surrounding Nvidia and the results of the US midterm elections.

AI Infrastructure Debt Expands Rapidly

The Federal Reserve’s report highlighted the growing financial commitments supporting data centers and other advanced computing infrastructure.

Debt issuance associated with advanced computing reached $680 billion by October 2026, approximately five times the total issued throughout 2023. Such borrowing now represents nearly one-third of all nonfinancial investment-grade corporate debt issuance, compared with less than 6% three years earlier.

The scale of investment has prompted comparisons with the broadband telecommunications expansion of the late 1990s. The Federal Reserve noted that the current AI infrastructure investment cycle could potentially surpass that earlier period.

The rapid expansion reflects the capital-intensive nature of AI development, particularly the construction of data centers and supporting computing capacity.

Complex Financing Creates Interconnected Exposures

The Federal Reserve also raised concerns about the financing structures supporting AI infrastructure projects.

Large technology companies, including hyperscalers and graphics card designers, can support projects undertaken by smaller third parties through long-term contracts, leases, guarantees and equity investments.

The report estimated that debt, guarantees and leases that have not yet commenced could exceed $3 trillion.

These arrangements can create what the Federal Reserve described as circular financing dynamics. Large companies may help finance infrastructure projects while also benefiting from the resulting computing capacity and services.

Such structures could allow major firms to absorb losses if an investment downturn occurs, potentially limiting the immediate impact on the broader financial system. However, the central bank warned that the largest companies’ actual exposure could be substantially greater than their reported balance-sheet liabilities suggest.

The interconnected relationships among data center developers, public credit markets, private lenders and special-purpose financing vehicles create vulnerabilities that require close monitoring.

High Valuations and Leverage Add to Market Risks

The Federal Reserve found that asset valuations across several markets remained elevated, partly reflecting investor enthusiasm surrounding AI.

Investment in the sector has also become an important contributor to US economic growth. However, an unexpected slowdown in AI-related corporate earnings could trigger falling asset prices, tighter credit conditions and reduced investment, potentially weighing on broader economic activity.

High leverage in parts of the financial system could amplify such a downturn. The report specifically highlighted hedge funds, where leverage among the largest firms remains at its highest recorded levels since data collection began in 2013.

What Investors Should Watch Next

The sustainability of AI infrastructure investment will depend on whether corporate earnings and demand for computing capacity justify the scale of financing committed to the sector.

Investors will need to monitor debt issuance, off-balance-sheet obligations, financing relationships and leverage across financial institutions. A deterioration in AI earnings could expose vulnerabilities extending beyond technology companies into credit markets and the wider financial system.

The Federal Reserve’s findings suggest that AI is no longer viewed solely as a growth opportunity. Its financing structure and potential market-wide consequences have become central considerations for financial stability.